Technology

Cisco Faces Tough Task Trying To Grow In China

The computer networking leader's growth in the region has slowed and could continue to sputter because of several factors, analysts say. They cite increased competition, a slowing economy and a backlash from charges by the U.S. government that expansion of two China-based rivals in the U.S. could lead to spying and theft of trade secrets by China's government.

In its fiscal first quarter ended Oct. 27, Cisco Systems ' (CSCO) revenue from its Asia Pacific China and Japan region rose 7% vs. the year-earlier period. The company doesn't break out numbers just for China, but executives characterized revenue from there as flat.

China is one of the fastest-growing markets in technology.

Cisco could be feeling the effects of competition from such players as Huawei Technologies, says Rohit Mehra, an analyst for research firm IDC. He also says U.S. government assertions in late October that expansion in the U.S. by Huawei and China's ZTE could lead to spying and cybertheft by the Chinese government.

"We need to watch those results for three or more quarters to start to think what potentially might be the impact from the negative publicity that Huawei (and ZTE) has had in the U.S.," Mehra said.

In October, the U.S. House Intelligence Committee released a report warning about expansion in the U.S. by Huawei and ZTE because of the potential threat of corporate and government espionage . Analysts say U.S.-based Cisco, and other companies, could suffer from a backlash to its business in China.

During a conference call with analysts on Nov. 13 to discuss first-quarter results, Cisco CEO John Chambers said the company will continue to be aggressive vs. Huawei and others in China. But he also said the U.S. government's comments "put more pressure on us in China. We will partner in China and we'll work through the ups and downs in the China market; we do think with the challenges going on that we will be under pressure in China for the next couple of quarters ... ."

In a later interview with IBD, Rob Soderbery, general manager of Cisco's enterprise networking group, sidestepped the government spying charges.

"We do have a challenge in the market with respect to Huawei and the approach they use in the market," he said. "Nonetheless, we are very committed and we are investing heavily in the China market."

In China's market for gear for enterprise networks and data centers, Cisco competes with Huawei, ZTE and Hewlett-Packard (HPQ).

But the fastest-growing market for equipment makers in China is for telecom gear, where Cisco competes with Ericsson (ERIC), Alcatel-Lucent (ALU) and Nokia (NOK), says IDC's Mehra.

"The infrastructure rollout by those guys have been very strong, including Wi-Fi equipment rollouts to offload data capacity going over the cellular networks," he said.

Soderbery says routers and switches, Cisco's bread-and-butter, are its best-selling products in China. But Huawei is the No. 1 seller of routers in China.

Cisco has teams with local companies in China to spur growth. One example is a pairing with City Cloud International, a China-based maker of software for managing municipal works, Soderbery says.

"Their software runs on top and our infrastructure talks to the street lamps, service delivery vehicles, the water meter, all of the infrastructure across the city," he said. "We did that as a joint venture where we could participate more tightly with the local market."

Such partnerships are necessary, says IDC's Mehra.

"There is competition from the likes of D-Link and other smaller vendors (in China)," he said. "They generally focus on the small-business market and always try to go up the food chain."